Staying afloat

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Most business owners have experienced a cash flow crisis. They occur when a busy season is unexpectedly slow or accounts are past due. When your cash flow is low and creditors are knocking at your door, it’s tempting to dodge them until you have enough money to pay up. But experts say that’s precisely what you shouldn’t do.

“That’s what gets small businesses into trouble,” says Gary Hayes, director of collections for the National Association of Credit Management in Phoenix. “That’s when we follow up with a lawsuit.”

Instead, draft a plan to pay your creditors back and approach your banker, landlord, vendors and anyone else you may owe, advises Michael York, state director of the Arizona Small Business Development Center Network with the Maricopa Community College District in Tempe, Arizona. York, a former restaurant owner, was able to negotiate a more favorable lease with his landlord. The deal enabled him to continue operating until he sold his business.

“It’s a business proposition,” says York. “The secret of this deal is just like any other sale. You need to make it a win-win situation. You need to show that in the long run, your creditors are better off if you stay open then if you close.”

The following tips should help you stay afloat during a cash flow crisis:

Don’t panic. Accept that risk is part of being in business. Preparing yourself for the worst-case scenario-having to close your business-allows you to proceed without fear clouding your judgment. Keeping a clear head can also help you avoid doing something illegal, like dipping into employee FICA deductions, or unethical, like not meeting payroll.

Ask for help. “The pride factor is an issue for business owners in trouble,” says Hayes. “They have had a successful business for five, six, seven years, and they don’t want to admit that they are having a problem.” Free consultation is available through organizations like SCORE (Service Corps of Retired Executives, 800-634-0245, or www.score.org).

Determine the root cause. If the crisis was caused by something beyond your control, such as a downturn in the local economy, creditors are more likely to extend your terms, says Bruce Hodgman, assistant director for economic development with the Arizona Small Business Administration in Phoenix. If the crisis was caused by mismanagement, implementing a solution will prevent future cash problems and provide credibility.

Resist throwing money at the problem. “A cash crisis is a result of mismanagement, not cash need,” says Hodgman. Borrowing from Peter to pay Paul can plunge you into a cycle of debt. Similarly, selling assets to raise short-term cash only prolongs the agony when doing so deprives the business

of the equipment it needs for day-to-day operations.

Restructure your debt. If the prospect of bankruptcy looms large, retaining the services of a debt-restructuring attorney can help keep your business open, says attorney Alan Buckholtz, a debt restructuring specialist with 30 years experience based near Los Angeles. An expert who knows the law can reduce debt, interest and monthly payments, and an attorney often has more clout, access